Europe’s demographic challenges — falling birth rates, people living longer, and an older population increasing the tax burden — could shave 4% off its gross domestic product by 2040, Bloomberg reports, citing a Morgan Stanley report.
Morgan Stanley predicts Europe’s working-age population will shrink by 6.5% in the next 16 years. The heart of the problem will be fewer working-age people producing output and paying taxes.
While the fewer people remaining in the workforce may earn higher wages, the negative productivity is projected to drag down gross domestic product (GDP) and corporate earnings.
Italy is poised to suffer the worst, with its GDP falling 6% in the next 16 years, followed by sharp declines in France, Germany and other countries where hospitality is a big driver of the economy.
The only country set to expand is the UK, where Morgan Stanley forecasts a four percentage point increase in GDP due to a stabilized working-age population.
Morgan Stanley says there are three possible solutions to the pending demographic crisis in Europe and other Western countries.
The first, a baby boom, is the most unlikely. Even if it were to occur, its benefits would not boost the economy for 15-20 years.
The second, Morgan suggests, is to expand childcare, combined with encouraging legal immigration. Both “could provide some support to fertility rates,” Morgan’s report said.
IVF also holds some promise, the bank said. “Hence, we think there is some scope for fertility rates to at least stop falling.”
Immigration has been a hot topic in Europe in recent years, with conservative, anti-immigrant parties gaining ground this year. This includes the National Rally in France and Alternative for Deutschland in Germany.
A third option is to raise the retirement age and increase women’s participation in the workforce. This option would increase Europe’s GDP by four percentage points.
Morgan Stanley concludes its report by calling the pending population crisis an existential crisis that Europe must address — or face economic disaster.
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